Why is Consumer Duty regulation important?

The Financial Conduct Authority’s updated Consumer Duty regulations come into force at the end of July this year and companies will be expected to be able to show some evidence of movement towards compliance.

The need for an update was highlighted by the growing knowledge gap between buyer and seller, with some sellers exploiting that knowledge. Financial services business customers often have very limited knowledge of the products and services offered to them and rely heavily on advice from the providers when making choices. Financial Ombudsman Complaints have been rising steadily year on year, and consumer trust is at an all-time low, threatening an already volatile market.

Communications as a part of Consumer Duty

Communications are an integral part of Consumer Duty, the first part of which comes into force on 31st July 2023. For customers to benefit properly from any product or service they must have a clear understanding of all the options available to them along with potential benefits and risks.

The main issue with conforming to the new Consumer Duty is communicating with clients, according to Lang Cat Founder Mark Polson¹. The regulations aim to ensure that a diverse range of consumers have access to suitable products that provide fair value for money. For organisations providing these products and services, this means using customer communications channels to:

The expectation is that every organisation will be able to gather data on consumer understanding and provide this as part of their Consumer Duty reporting. Tracking and reporting key performance indicators will encourage firms to monitor and improve customer understanding and experiences.

What can you do to prepare for compliance?

Reviewing your customer communications plan is a great way to get going. Read on for more detail or skip to the end to jump straight to the action list.

1. Help customers understand their choices

Communications should be constructed to help customers understand as much as possible about the options available to them. How far you tailor a communication depends on whether it is a high-volume communication or a one-to-one. An advisor would be expected to provide detailed explanations and context for a customer on a phone call, for example.

“If advisers simply pass on material to their clients which they cannot possibly be expected to read and expect them to make decisions based on that material, they will have “failed” in upholding the spirit of the Consumer Duty.”¹

For years firms have made terms and conditions more and more complex as they look to cover every possible scenario, but there is now pressure to make them concise and easier to understand. Even if they are not shortened it will be an advisor’s responsibility to make sense of the content for their customer.

A communication detailing a product update which is sent to a large number of customers should be personalised but does not have to be tailored specifically for every customer. Having said this, from a customer experience point of view, the further you can go with relevant personalisation, the better.

The design and layout of communications, selecting the right channel and timing are all important. Personalised video is an excellent way to engage and educate customers on complex products and, with detailed management information, can help firms demonstrate improvements.

2. Eliminate or reduce foreseeable harm

As part of the gap analysis firms will be expected to identify products or services which are not providing good customer outcomes. Where appropriate, customers should be sent a communication to inform them that an alternative product or service is available. While it is not the Duty’s intention that products and services be removed, this may well be a natural consequence of the regulation.

“Depending on the context and the scale of the harm, firms looking to address an identified issue could start by amending their communications, testing consumer understanding and monitoring outcomes before trying other actions.”²

A good place to start is with any low-hanging fruit. A good example of this would be where a product switches to a more expensive rate after an introductory period. This could be a mortgage rate or the interest rate on a credit card. A communication or series of communications making sure that the customer understands the changes is recommended. If your data discloses that a customer does not read emails, for example, you could switch to an alternative channel such as post.

A true omnichannel solution with detailed MI reporting is the best way of ensuring that your firm communicates effectively with your customers.

Focus should be placed on any products or services that are causing harm to the consumer. A customer could be unaware that they are paying far more than the typical price for a product. It is the providers responsibility to make sure the customer understands this and offer alternatives wherever possible.

3. Satisfy the regulator

Firms should look at communications holistically to ensure that they meet the expectations of the Duty. This will include reviewing every form of communication with the customer; verbal, digital and physical. The context of every communication is important. You should try to understand as much as possible about your customer base on a broad level. Any chosen communication channel and format should be suitable for the customer. The Duty raises the standard of care for all customers and should be viewed alongside the guidance on the fair treatment of vulnerable customers (FG 21/1)³.

The FCA has highlighted that the number of vulnerable customers is higher than most people appreciate; one in seven adults having low levels of literacy and one in three demonstrating lower levels of numeracy. There is plenty of room for improvement in how firms communicate. Communications can be made more concise, easier to understand and more accessible. Relevant information should be sent over the right channel at the right time.

If a customer has opted out of marketing communications that is their prerogative. There is no requirement to market new products to them under the Duty. However, it may still be appropriate to communicate more general information within a service message, as long as this does not contravene GDPR, Data Protection and PECR laws.

4. Measure your success

“We want firms to be able to demonstrate consumer understanding – because they have tested it and made improvements to their communications, where appropriate, to support good outcomes.”²

The Duty suggests three ways to monitor your success: The Financial Lives Survey (conducted by the FCA), the number of consumer complaints, and utilising firm management information.

Rich management information on the delivery, receipt and engagement of all forms of communication will all help you fine-tune your customer communications processes. Surveys and customer satisfaction scores provide further information that you can also use to measure and improve.

The Action List

It is always tricky knowing where to begin but here are our suggestions:

• Review customer journeys
• Review your customer communications plan
• Offer alternative channels and formats to vulnerable customers
• Look for signs that a channel is not sufficient to meet a customer’s needs
• Make it easier for customers to engage in two-way conversations
• Review and simplify terms and conditions
• Review and update data collection (including predictive analytics)
• Review and use MI to improve

If you would like any help or to learn more, please get in touch with us at [email protected]

References

1. https://www.ftadviser.com/regulation/2022/11/07/client-communication-is-the-fundamental-issue-of-consumer-duty/
2. https://www.fca.org.uk/publication/policy/ps22-9.pdf
3. https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf

In the UK, the FCA has recently announced the version of their Consumer Duty regulation which will intrinsically improve how consumers are protected. The changes impose higher standards for consumer care and are designed to increase consumer protection whilst promoting effective competition across the retail and financial services sectors.

Previously, the approach had been reactive, which limited the extent of protection for consumers. However, this outcome-based approach places consumers’ needs firmly at the forefront of the regulation and ensures that products and services will meet consumer requirements. Furthermore, it’s expected that these changes will encourage firms to become more innovative and agile to meet the needs of their consumers with the introduction of clearer guidelines in areas such as cost-cutting and communication.

The Timeline

Feedback received in consultation with stakeholders confirmed that more time was required and that the review of closed book products and services was likely to be the most onerous. As a result, the new schedule for implementation of the Consumer Duty is as follows:

• 31^st July 2023 for new and existing products or services that are open to sale or renewal
• 31^st July 2024 for closed products or services

The Components

The Duty comprises three main elements: the consumer principle, cross-cutting rules, and the four outcomes.

The new Consumer Principle requires ‘a firm must act to deliver good outcomes for retail customers’ and is supported by the cross-cutting rules that require firms to take all reasonable steps to:

1. Avoid foreseeable harm to customers
2. Enable customers to pursue their financial objectives
3. Act in good faith toward customers

The four outcomes the FCA are seeking are as follows:

1. Fair value – consumers receive fair prices and quality
2. Suitability and treatment – consumers receive suitable products and services and receive good treatment
3. Confidence – consumers have strong confidence and levels of participation in markets
4. Access – diverse consumer needs are met

Scope

The scope of the Consumer Duty is broad, as the term ‘retail customers’ also applies to products and services delivered to corporate entities as well as individuals. The Duty will also apply to firms that do not have a direct relationship with the end customer and have a material influence on retail customer outcomes. However, it is not applicable to a company that provides IT systems.

Under the new regulation, firms will have to consider every single step of the customer journey throughout a product’s life – including product design, marketing communications, and customer service across the entire product life cycle.

Impact

Whilst many firms are already providing good service and fair customer outcomes, others will require renewed focus and potentially significant effort to comply and meet the deadline. Initially, all firms will be required to complete detailed product reviews and document all decisions made along with their recommended actions.

This regulation could require some financial services firms to undertake a large-scale review of their products, IT, operations, customer service, and customer communications. This regulation includes products sold direct to customers as well as through third parties, therefore the product owner is always accountable to comply with the regulation, potentially adding complexity and cost to some organisations.

The Consumer Duty could impact some firms’ profitability, as customer service must meet the reasonable needs of the consumer. Organisations’ back-office operations, customer service, and communications capabilities could need significant changes to comply with the regulation. Complying includes supporting the ability of customers to easily leave, cancel or transfer their product in a frictionless way. In other words, it must be as easy to exit or transfer as it was to purchase.

Firms will also need to assess their products as to whether they deliver ‘fair value’. This will need to be fully documented in their own assessment of pricing structures, and the review process may lead some firms to conclude high margin products need to be reassessed, potentially impacting overall profitability.

Implementation

The FCA has set out its expectations for the implementation period:

1. Implementation plan ratified by the board – Oct 2022
2. Complete review of all products and services prior to April 2023 and then remedies by July 2023
3. Prioritise any serious items causing immediate consumer harm
4. Consider bringing forward any changes that give consumers better outcomes
5. Engage with FCA where products and services will be withdrawn
6. Boards responsible for review and monitoring to keep on track
7. Alert the FCA if work will not be complete. Prioritise those actions with the biggest impacts on consumer outcomes
8. At the end of the implementation period boards should be sure that they are complying and remedy any gaps or weaknesses

Communications

A firm’s communications form a vital part of delivering a good outcome for their customers, an example might be the need to clearly communicate alternative product offerings. There is also very specific guidance on how to support vulnerable customers. We will delve more into communications and the Duty in our next blog.

Enforcement and monitoring

To meet the new requirements set out by the Duty, governance processes will need to be reviewed and updated, and customer outcomes will need to be tracked and measured. Entire customer service processes, measurement and reporting will need to be reviewed and updated to ensure the right outcomes for customers, and any product changes quickly and effectively managed and communicated.

The FCA will expect a company to be able to provide them with:

• Evidence of the appointment of a champion at board level
• MI specific to the Duty
• Part of the Annual report dedicated to the Duty

While currently there are no regulatory reporting requirements firms will still be expected to be able to demonstrate data collection and the results of their monitoring. Some consumer groups involved in the consultation felt that no regular reporting requirement would lead to non-compliance. However, the FCA has indicated that it will use its full range of powers to tackle any serious misconduct which could include a fine or securing redress for customers that have suffered harm.

“When considering whether a firm has fallen short of our expectations, we form a judgement on whether the firm has acted reasonably taking into account the rules and guidance applicable, as well as the facts and circumstances of each case. This will not change under the Duty. The only difference is that firms will be judged against the higher standard set out in our new rules and guidance.”

Third-party support

In support of the four outcomes (the key elements of the firm-consumer relationship), firms could choose to work with third parties to help shape and deliver improved customer service and communications. Working closely with specialist communication companies, such as APS Group, across the key areas listed below, could create a simpler path to compliance whilst improving customer service and communication, and ultimately managing operational costs down.

1. Communications
2. Product design
3. Customer service
4. Price and value

As customer communication specialists, APS Group can support your Consumer Duty-related review and future requirements to meet the regulation. Using its specialists to advise on all communications, starting with the output from the product design phase, they can work with you to complete detailed customer journey mapping of each product and design bespoke communications, giving your customers individual flexibility in their communications and channel of choice.

APS Group will advise, design, build and deliver an ongoing service to all of your regulatory customer communications, in a secure pay-as-you-go model.

Sources

https://www.fca.org.uk/publications/policy-statements/ps22-9-new-consumer-duty

https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf

https://www.fca.org.uk/publication/policy/ps22-9.pdf

It’s wonderful to have in person events back again, and last night our attendance at the The Scottish Design Awards, was made even more special by winning the Packaging Category for our work with the Isle of Harris Gin Distillery. These awards celebrates the very best of Scottish architecture, arts and advertising.

Our partnership with Isle of Harris Distillers has been a 7-year working relationship and we couldn’t be prouder of the creative work we have produced with them over the years. Last year we also won a Drum Design Award in the Resourceful Design category as well as a coveted wooden pencil award from D&AD Awards for Packaging Design so it’s fantastic to see this partnership thriving throughout 2022 as well.

Based in Outer Hebrides, the Isle of Harris Distillery prides itself on embracing the beauty character of the island and the people who live there, with every drop of their award-winning gin inspired by their local surroundings.

We were tasked with creating packaging that would reflect the Distillery brand values and compliment their heritage but is also 100% recyclable, and crucially suitable for the challenges of posting fragile products.

The packaging wherever possible seeks to lead the recipient through layers of information about the brand. When the glasses within the gift packs are unremoved, the story of their hand-blown creation Is revealed, and an inlay provides more details about the ingredients used to create the gin’s unique maritime flavour. Whilst the hinged mechanism design ensures the glasses are kept secure during transit or In a retail environment.

To find out more about our creative design and packaging services, and how we can assist your organisation with any creative and design needs, please get in touch at [email protected]